Reboot Alberta

Tuesday, September 25, 2007

A Reality Check on Oils Sands Costs and the Impact on Albertans.

Let’s get something straight about oil sand project costs. The oil sand project developers total project costs are paid by the citizens of Alberta in forgone royalties. This is under the current regime and would continue under the recommendations of Royalty Review Report. Only 1% of gross revenues are due as a royalty until all project construction, financing and operational costs during a project build and prior to plant production.

Sure government get taxes on the industry activity from personal income taxes on citizens who earn a living from working on are with the various projects. They get corporate taxes on net profits again – after all expenses are paid.

With that deal from Albertans why would project developer’s care about cost over runs? They end up being paid 100% by deferred royalties by Albertans in any event. Even after project costs are recovered and the royalty kicks in, the current 25% and the proposed 33% royalty of oil sands is only on NET PROFITS. Again all developer operating and related costs of a plant are deducted before royalties are calculated and charged. If a project has a net profit of 10% ( a modest assumption) that is the amount the royalty is calculated against - nothing more.

Besides project costs are management decisions in the hands of the corporations. If they are too high then management of the corporations needs to control them or make alternative arrangements. Like howabout spreading out the projects so they do not all chase the same workforce and suppliers at the same time and drive up prices for labour and materials.

When an oil sands project has a doubling of costs (and that seems to be the norm) they don’t even have to go back to further approvals from the EUB to have the impacts reviewed again. Those increased costs change the essence of the approvals and are not neutral on the rest of the Alberta economy nor the economy in the rest of the Canada. The project managers don’t have to consider the increased cost and accelerated project approvals might have on cumulative impact on housing prices, inflation, wage escalation and competition with other sectors or if municipalities can afford to compete for steel and concrete for public infrastructure.

At at high oil prices they can absorb the cost increases handily so they don’t seem to worry about the implications to other on such decisions. They get to unilaterally turn the entire province into what Fort McMurray has become...thank to the benign neglect of the Klein regime to the regional needs. IN fairness it was the oil sand companies working in conjunction with the municipality that did the calculation and delivered the needs assessment to the Klein government - only to be ignored at the political level. I know because I was on the team with industry and the regional government that wrote and presented the Wood Buffalo Business Case to the Alberta government in 2005.

To say high costs for project is a barrier and royalties are to be kept as they are is rich given who makes the decisions and that the rest of us end up paying the pipers. If that is not infuriating enough, I understand the oil companies have had record sustained profits in the recent past. Here is the kick in the head. Apparently senior people in some companies have had seven figure annual bonuses AND those costs are seen as project costs as well so the rest of us get to pay for them too.

Please you scions of the Alberta energy industry - say and prove this bonus bulls##t ain’t so. Inquiring minds want to know.

2 comments:

  1. Anonymous11:16 pm

    I don't think industry should be punished because of higher oil prices. They also have to contend with higher wages, which in turn means more tax revenue for the Alberta government. You're sounding like a dipper.

    ReplyDelete
  2. Anonymous1:19 pm

    WAY out to lunch, Oil sand projects are very Capital intense... Upfront. Would YOU be willing to put up 9 billion dollars such as CNRL WILL HAVE DONE FOR THERE hORIZON PROJECT.and not see a cent of revenue in return for several years?" Alberta would not be getting a cent in royalties if it wasn't for the high capital put into projects by Oil companies. Sure the reserves belong to us Albertans but we need the oil companies to extract and get it to market for us to make any money on it. Unless you have several Billions of dollars we can use...

    PS all this capital spent by Oil campanies is spent on construstion/ labour/taxes etc which goes where?? Well back to Albertans through ALberta based service/construction companies and Albertans as labourors.

    PS Oil companies aren't saying no to a hike in royalties, but follow the formula.

    Industry activity X Royalites= Money for Alberta.

    No what happens when projects become uneconomical? Indsutry activity weakends.. ie less wells drilled ( which we see we see already with poor gas prices) means less royalties.


    Oh and sure that CEO might make more money then you but I gurantee he pays a lot more tax then you do. I am sure 10% of the Albertan population is paying well over 30% of the taxes or more.. So yes lets cut his pay and maybe then we can increase personal taxes to make up for the taxes lost...

    Man maybe instead of complaining so much, why not sit back and count how many people you know in your little world who work for an Oil/gas/ service company, heck even that little mom and pop store in Red deer who feeds lunch to the Oil tank welders across the street.

    ReplyDelete

Anonymous comments are discouraged. If you have something to say, the rest of us have to know who you are